Sleepability Versus Optimality

First up is a conversation started by Cullen Roche about defined outcome/buffer funds.

Part of our regular discussion here includes referring to funds or strategies as being valid even if not optimal. Using buffer funds as equity proxies is far from optimal but it can be valid. You've probably heard and read people talk about having a portfolio that you can live with or will let you sleep at night which is probably why buffer funds have become so popular. 

The math supports the AQR notion that you'd be better off owning less in equities and more cash to capture the buffer effect. I don't think I've seen AQR allege that any of the buffer funds have malfunctioned, just that they are inferior which they probably are. Smart people mock line item risk but from the end user's viewpoint it might be easier to stay invested when instead of a 30% decline like the Covid panic in 2020, their buffer fund only drops 15% (just making up an example) irrespective of the portfolio weighting. 

Cullen obviously makes the point about sleeping in his comment. For the last 15 years, the S&P 500 has compounded at 14.79% and 60/40 as measured by VBAIX has compounded at 9.92% with 10 drawdowns of at least 10% for the S&P 500. The corresponding drawdowns for VBAIX were usually less but not always. Maybe someone can get what they need compounding at only half that rate for being a little ahead of where they need to be with their account balance and feeling they cannot tolerate huge declines very well. 

Look back at the same 15 year period and the drawdowns and realize that in every single one, people panicked out believing whatever the event, it was somehow different. Of course none of the were different and market kept working higher even if in fits and starts occasionally. 

Tony Isola wrote about what he called the first decade retirement plan which focused on health adjusted life expectancy, the years where people are still able bodied before getting "old." The amount of time that we are living after being able bodied is increasing which is negative in terms going many years without being able to do what you want to do. 

I didn't see a source cited for the chart but if I'm reading that correctly it's saying beyond 64, we collectively deteriorate quickly. In many (I think most) cases this is very preventable. We learn as children to exercise and not eat too much sugar and of course the vast majority of people do not exercise and do eat too much sugar. 

There are of course financial implications for retirees either spending a lot on medication or not if healthy and fit and quality of life issues with how they feel and what they are able to do with their time versus spending time in endless doctors' waiting rooms waiting for appointments. 

We all know or have known people in their 70's capable great things physically, maybe running or ability to climb mountains or whatever. Some slice of the population will simply be lucky on this front but most, me included, just need to put in the work. Not even a lot of work. 

@Mangan150 on Twitter talks constantly about just needing an hour/wk of intense exercise and then being somewhat active during the week. I would encourage a little more than that but people just trying to be lean and fit do not need to be in the gym everyday and don't need to spend many hours every week. A moderate amount goes a long way.

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